If you are a new reader, there are helpful links at the bottom of this post. Apologies for the delay, my panel on the conference this past friday was a success and my segment was fire (of course). I guess I will be doxxing myself and sharing the video of the panel here once it’s published in ~2 months.
Table of Contents
US GDP
Interest Rates
ECB
BoJ
Bank of Canada
Crypto Macro
Price Action
Bitcoin Miner Insolvency
Conclusion
Internal References
1. US GDP
I missed this in the forecast for this week. So, unfortunately we get no prediction from me and only a reaction to the news. It’s easy to react to the news, a lot harder to predict, so just assume I would have gotten this wrong, the initial GDP figure showed 2.6% growth in Q3.
I honestly had no expectation for how they could have reached a positive number on Q3, you’ll remember that the Atlanta Fed GDPNow predictions for Q3 had been basically flat up until the last minute.
Q3 is the only quarter this year in the US that has any chance of being positive. If this past quarter is not positive, then this entire year will be dominated by 4 straight negative quarters.
Looking ahead the major financial entities are finally predicting negative GDP, but the Atlanta Fed is the lone hold out predicting a 0.3% GDP growth for Q3. I would normally make a joke about the definition of a recession, but we are beyond boom and bust.
Lets dig in to the initial figure for Q3 GDP and see what information we can find. Please also remember that this is the initial number, the GDP figure is revised two more times to reach a final official figure.
They are claiming that expenditures increased across the board while exports increased and imports decreased. Typically in an environment where the local currency is appreciating against all other currencies exports would decrease as foreign buyers can afford to import far less from this country. Consider Japan, the Yen is down almost 50% against the US dollar, so a buyer in Japan with 1 million Yen today could only buy as much exports as 500,000 Yen would have bought in October 2021. So they will naturally be purchasing less goods from the US. Similarly, a US importer who has $100,000 USD can now purchase $150,000 USD worth in October 2021 dollars when importing from Japan. So you would expect them to be purchasing more goods to import since they can afford more.
Yet somehow this GDP report states that exports increased moderately from the previous quarter while imports of goods decreased significantly. This improves the GDP growth figures significantly, since Exports are added to GDP, while imports subtracted from GDP. Take note that the numbers in the table above are “chained dollar estimates.” They don’t make sense on their own but can be considered to be the net contribution to the change in GDP from the previous quarter. So for instance, you would say that the import of goods in Q3 contributed 1.2% more to GDP in the positive direction compared to Q2. These numbers are not a reflection of net exports. We are still net negative for the year on trade balance.
What does this mean for markets? Well it means that the Federal Reserve is being given an even larger green light to raise rates. You’ll recall that Powell was not market sensitive anyways, but it’s always much easier to do these things when the market isn’t collapsing as well. But, ironically the markets are only moving up because traders are anticipating a pivot and trying to front-run Federal Reserve actions. On November 2nd the Fed will be announcing their next rate hike and I expect that the markets are going to be surprised. It’s still far too early for them to lift their foot off of the gas if Powell did indeed mean what he said earlier. But the markets are anticipating that from him anyways. We were granted an Uptober as many people were hoping for with the best October performance of the DOW since 1976.
Markets made a huge comeback in October. The Dow guided those gains, soaring 13.95% for the month. The 30-stock finished its best month since 1976 as investors bet on more traditional companies, like banks, to lead the next bull. The S&P and Nasdaq gained about 8% and 3.9%, respectively, for October.
Looking at the chart above you’ll note that October was completely sideways up until October 21st when the markets were given a little nugget through the Wall Street Journal that they treated as gospel. The chart above is still significantly bearish and shouldn’t be making anyone feel hopeful at all, I’d expect another leg down just from the chart alone, the macro only further supports this.
That nugget provided to the markets was that a 0.75% rate hike was coming in November and then an internal discussion would follow about maybe decreasing the rate at which they hike rates in December. As far as nuggets go, this is nothing. We already know that the Fed has dropped forward guidance and will be discussing maybe decreasing the size of rate hikes at every future meeting. What’s left unsaid is that they are also open to discussing increasing the size of rate hikes too. As far as information goes this is nothing, but the markets were desperate for a narrative and they got one. Whether the narrative was true or not is irrelevant. Until the Fed pivots, nothing matters. No rumors, no hints, nothing. A pivot is the only thing that matters and Uptober will likely be brutally short if the Fed sticks to their guns and continues the fight against inflation. But if the Fed decides to be market sensitive then we will be settling in for the long haul of inflation engrained deep within the markets and begin making our way down the road to becoming Argentina. Do not forget that we are in the middle of a diesel shortage and are still depleting the SPR to keep gas prices artificially low as white collar layoffs accelerate into the end of the year. Why pivot now? Just because some traders want gains? There’s been no reason to do so, people forget that the Fed can influence markets by speaking and they know that they can do this. Statements like the one they made were crafted specifically to talk traders into injecting liquidity into the markets so that the Fed doesn’t have to do so yet. What’s better than printing $5 billion? Talking traders into injecting $5 billion of liquidity into bond and asset markets.
People are afraid of being “too late.” Lol. When the Fed turns the money printers back on it will be the start of a run that will likely last over a year if not longer. There’s no hurry to get to the market a week before the Fed softens, because the risk is significant. Traders, even those who are fairly seasoned will fall for this stuff and mistake a short 1-2 week pump for the start of a generational bottom. If you’re just trying to leverage trade intra-month, then yes, rumors and articles like the above are entry signals because you’ll be exiting 10 days later. But if you are trying to ride much longer market waves and cycles, then this is just hopium. Remember to express patience, the markets aren’t going to leave you behind, and if the move is significant it won’t matter if you were a few days or weeks late. If the move isn’t significant than any entry will be in error unless you possess the foresight to close the position early in profit.
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